Rethink Commerce Blog

8 Tips to Consider When Creating Pricing Packages for Subscription-based Software

Posted on November 3rd, 2016 by

Subscription software revenue is expected to hit $130 billion by the end of this year. That’s a 21 percent increase over 2015. There’s no doubt, the subscriptions model is gaining ground. However, even the best products can fail in the market, simply because of poor pricing strategies. And the truth is that pricing is hard. Determining the right price and model for your subscription or SaaS offering is one of the most difficult decisions a software business needs to make. Set the initial price tag too high and you risk pricing yourself out of business. Set it too low, and you could find yourself at the bottom of the market, with a customer base unlikely to provide much value over the long-term. Your pricing needs to offer a cost structure that gives customers the innovation, flexibility and service they demand for the price and terms they are willing to pay.

Here are eight pricing/packaging tips to consider for your subscription products, whether on-premise or in the Cloud.

1.     Understand Your Costs

You must understand the scope of both the tangible and intangible costs before effectively pricing your SaaS or subscription products. Decide on and relentlessly measure your key cost metrics, allowing for constant improvement and adjustment. Additional cost can come from hosting, new accounting systems, and support. Cost saving items should also be factored in. Make sure to also take into account the other side of the equation, i.e. the cost savings your customers will receive by switching to your solution. This is especially relevant for complex software, where reductions in hardware, maintenance, support and IT staffing level costs can provide your buyers with major savings.

2. Define Your Audience & Be Flexible

Pricing decisions shouldn’t take place in a vacuum. “Vendors must begin thinking of their application portfolios as flexible platforms that allow customers to choose between software components and pricing models,” concluded research from PricewaterhouseCoopers.

As an on-going business, you should already know who your best customers are and what features and capabilities are most valuable to them. With your analysis, you should also be able to segment your audience into different user/skill levels and determine if a tiered structure that offers – for example entry-level and premium pricing packages – is appropriate.

Consider these three examples of how to customize your pricing model:

  • Price Based on Size of Employee Base: A simple pricing model, based on the size of the team using it, easily validates price differences and makes the plan choice an easy one for clients. It allows you to focus your marketing message solely on the product benefits, instead of having to explain what additional benefits come with more expensive plans.
  • Transparent Customization: HubSpot is an excellent example of giving customers power over their plan. Prospects can easily select their number of contacts and view their total costs. The transparent process puts customers at ease because they know the costs up front. They can easily pick the level that fits their company best. Customers are often frustrated when they have to personally contact customer service because they cannot find a package that fits. Be completely transparent and clear.
  • A Tiered Structure: Including a tiered structure helps increase the customer’s perceived value of your product. Create a flexible structure, empowering prospects to make the decision that best fits their needs. A word of caution here: the strategy is that the low package users will eventually scale up to higher plans as their needs grow and they realize how much value you provide them. In reality, that is not always the case. Improving service quality with limited resources is never easy, which is why it is important to charge your clients a competitive price for a full suite of services.

3. Experiment with Trials and Freemiums

A popular strategy is to allow new prospects to use some version of the product for free.  Usage is the new way to engage, and engagement leads to monetization. Trials and test drive programs are a good way to get early feedback and ensure that a more focused approach to conversion can follow. But be careful, because, like with pricing itself, an effective trial or freemium requires a delicate balance between providing value and an incentive to convert or upgrade.

A paid trial or a free trial with payment details will increase the barrier for sign-up, but in exchange will ensure you have more qualified sign-ups that are more likely to turn into paying customers at the end of the trial. Decide on the best option based on your target audience and your goals.

Also, do not leave trial conversion to chance. Sending automatic notifications and automatic product activations are tools that will increase usage and drive trial conversions up.

4. Monthly or Yearly Subscriptions?

Defining the billing cycle is also important. Take into account how your clients interact with your product, the learning curve and the need your product serves.

Promoting annual subscriptions (maybe also with a discount) increases the revenue, which in turn helps increase product quality and will ultimately drive renewals. The longer your clients spend with the service, the more likely they are to renew.

By charging annual subscriptions up front, customers are more likely to engage with the service in order to get their money’s worth. In the process, they become more dependent on the service and more likely to renew. This kind of client is also more willing to take on the learning curve of a new product and show greater commitment to your service.

5. Cheaper is not Better

As mentioned in the beginning, don’t try to be the cheapest on the market. This approach to your pricing strategy will decrease your perceived customer value. The fact is that consumers will pay more for a valuable product.

Instead, create clear differentiators between your product and the competition. What are your product’s unique features? Can you provide a longer free trial? The best way to increase customer-perceived value is to make them more dependent on your software. Again, the longer they use it, the more dependent they will be.

Providing excellent customer support is one key differentiator that customers value, especially valid of subscriptions and software as a service. A lower priced product with poor customer support will lose quickly over a fairly priced product that comes with help when problems arise. Market your support services. Reassure your customers. Include testimonials from satisfied clients.

6. Regional pricing works

If you are selling internationally, it’s good practice to differentiate pricing strategies. Regional prices are a powerful tool when it comes to boosting conversion rates. Besides the obvious of displaying prices in local currencies, take into consideration currency fluctuations and lock your prices for each currency, to make them more appealing for your audience. Also, take into consideration local taxation that will also impact the final pricing, differentiated obviously for consumers and businesses.

7. Keep it Simple

Build trust by having an uncluttered, clear visual of your pricing plans. Your pricing should make sense to your customer. Basing it on variables within their company, makes sense. Charging them for every little extra is confusing and makes them feel like they got “suckered.”

Keeping it simple also means being more selective with discounted packages. Which takes us to one more tip.

8. Reward loyalty with discounts and special upgrade offers

Loyal customers should be rewarded, but don’t leave renewals to chance. Use tools that can help you increase renewal rates, such as setting up automatic renewal notifications with discounts included. But do not discount at the expense of devaluing your product. Instead of giving customers a free month as an incentive, offer a percentage off of their annual subscription. This sends the message that you value their business, while not devaluing the product.

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Adriana Iordan

Sr. Director, Product Management

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